Foreclosures hit renters too

Rise in mortgage defaults ripples beyond homeowners: report

CHICAGO (MarketWatch) -- The rise in foreclosures isn't just affecting homeowners, it's also putting pressure on renters, according to a report released Wednesday by the Joint Center for Housing Studies at Harvard University.

For one, the uptick in foreclosures is prompting more households to compete for low-cost rentals. Also significant is the number of renters who face sudden eviction when properties they're living in are foreclosed on, the report found.

"Today, investor-owned one- to four-family rental properties account for nearly 20% of all foreclosures," said Nicolas P. Retsinas, director of the Joint Center for Housing Studies, in a news release. An abundance of capital available during the housing boom years led to a substantial rise in high-risk lending to these absentee owners.

"Moreover, because many of the high-risk home-purchase and home-refinance loans now in default are concentrated in low-income and minority communities, the fallout from foreclosures is hitting the same neighborhoods where many of the nation's most economically vulnerable renters live," he said.

The number of renter households rose by nearly one million last year, which is more than four times the pace of renter growth between 2003 and 2006, according to the center's report, "America's Rental Housing: The Key to a Balanced National Policy." The U.S. median monthly gross rent reached a record high of $775 last year. Read the report.

Plus, the turmoil in the credit markets has raised the cost of financing rental-housing construction and preservation, causing completions of multifamily units to fall to 169,000 -- two-thirds of the number seen in 2002, according to the report.

Call to action

In short, the study shows that the demand for affordable rental housing is increasing while the supply of low-cost units is declining, said Jonathan Fanton, president of the MacArthur Foundation, which helped in funding the report. He and others involved with the study stressed that renters should not be forgotten as housing issues take center stage on Capitol Hill.

"The debate on national housing policy must not exclude the more than 35 million renter households. We clearly need policies that honor the role of rental housing as well as homeownership," Fanton said in a news release. See related Capitol Report.

Retsinas advocated a "balanced national housing policy" that would preserve the stock of subsidized rental housing, limit the losses of privately owned, low-cost units and eliminate land-use restrictions and other barriers that increase the cost of housing production.

"Not only for the last decade, but I could make an argument for the last century, this nation has genuflected at the altar of homeownership," he said during a presentation of the report on Wednesday in Chicago. "You want to fix a neighborhood, make them homeowners. Whatever it was, that was always the answer."

"As we have found so sadly and tragically over the last year or two, it is not for everyone and it isn't always the answer and it is not without risk," he said.

More statistics

The study also found:

Foreclosures are adding to the number of units that are held off the market, in part because of the long foreclosure disposition process and also because some who are buying the foreclosed properties are waiting for conditions to improve before putting the units back on the market.

In 2006, 42.6% of all working families didn't earn enough to afford an appropriately sized housing unit. Nearly half of all renters paid more than 30% of their incomes for housing in 2006 and a quarter spent more than 50%.

The minority share of renter households increased from 37% in 1995 to 43% in 2005, and Hispanic renters accounted for nearly half of the gain.

Newly built apartments in buildings with five or more units had a median asking rent of $1,057 in 2006, a record high. The median gross rent for all units that year was $766. Only 20,000 new, unfurnished apartments renting for less than $750 were completed in 2006, even though these units were most in demand.

Condo conversions rose from a few thousand in 2003 to 235,000 in 2005. Only 60,000 units were converted from rentals to condos in 2006. Virtually no conversions were completed in 2007.

From 1995 to 2005, two rental units were removed from the inventory for every three units built. The losses to inventory were the highest in the Northeast; there, two rental units were lost for every one built.

Making lemonade

The current conditions provide an opportunity to transform the inventory of foreclosed and vacant properties into affordable rental housing, Retsinas said. In some parts of the country, foreclosure problems aren't new: Serious mortgage delinquencies and foreclosures have been on the rise in Ohio, Michigan and Indiana for the past decade, according to the report.

"If the lemons are all these houses coming into foreclosure, the lemonade is that a large chunk of American housing is going on sale," said William C. Apgar, senior scholar of the Joint Center for Housing Studies, who spoke at the Chicago presentation.

The silver lining to the current foreclosure issues may be an opportunity to "use those discounted prices as one of the important subsidies to develop the next generation of affordable housing," he said. The tactic is far from a cure-all to the problem, but could provide needed additions to the affordable housing stock, Apgar said.

Currently adding to the rental inventory on the higher end of the rental market are the vacant condos and houses that owners are renting out due to weak home-buying conditions. However, many renters don't have the income required for those rentals, according to the report.

But some Americans who are losing their homes due to foreclosure may not be springing back immediately into the rental market anyway, perhaps doubling up for a period of time by living with friends or family while they recover from their financial stumble, said David Schwartz, managing member of Waterton Associates, a Chicago-based apartment firm.

He's actually seeing softness in apartment markets on a national basis; areas that are experiencing the greatest housing problems right now also have some of the highest rental vacancy rates, he added.

"There's some misconception out there that this is great for apartments because people are losing their homes -- now they have to rent, and it's putting upward pressure on rents and filling up apartments," he said.

But that isn't the case right now, perhaps also due to job losses in some markets as well as the supply of "shadow condo rentals" created when owners rent out their units instead of selling them in this market, he said.

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